Question

Ziege Systems is considering the following independent projects for the coming year:

Project	Required Investment	Rate of Return	Risk
A	$4 million	12.25%	High
B	5 million	14.75	High
C	3 million	10.25	Low
D	2 million	10	Average
E	6 million	13.25	High
F	5 million	13.25	Average
G	6 million	8	Low
H	3 million	12	Low

Ziege's WACC is 10.75%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

1. Which projects should Ziege accept if it faces no capital constraints?

Project A	Accept or Reject
Project B	Accept or Reject
Project C	Accept or Reject
Project D	Accept or Reject
Project E	Accept or Reject
Project F	Accept or Reject
Project G	Accept or Reject
Project H	Accept or Reject

B. If Ziege can only invest a total of $13 million, which projects should it accept?

Project A	Accept or Reject
Project B	Accept or Reject
Project C	Accept or Reject
Project D	Accept or Reject
Project E	Accept or Reject
Project F	Accept or Reject
Project G	Accept or Reject
Project H	Accept or Reject

If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

$ ----- million

Suppose Ziege can raise additional funds beyond the $13 million, but each new increment (or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which projects should it now accept?

Project A	Accept or Reject
Project B	Accept or Reject
Project C	Accept or Reject
Project D	Accept or Reject
Project E	Accept or Reject
Project F	Accept or Reject
Project G	Accept or Reject
Project H	Accept or Reject

C. What would be the dollar size of its capital budget? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

$ ------ million

Answer 1

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